Scrapping the income tax and replacing it with a national consumption tax, or sales tax, would do more economic good and cause less friction during a transition period than has been generally understood, according to a new book published by the American Enterprise Institute. Transition Costs of Fundamental Tax Reform, a collection of three essays by distinguished economists, may be regarded as the latest volley in a long-running debate over the relative merits of consumption versus income taxation.
Although the Congress and the Bush administration are occupied now with reducing income and estate taxes, proponents of fundamental tax reform are likely to reopen the case for shifting from income taxes to consumption taxes. The AEI study finds that such a fundamental change would do less damage than previously thought to home prices and stock-market valuations of companies. The study also improves upon past tax-reform analysis to include imperfect competition, risk, and human capital and demonstrates a dramatic increase in estimates of the benefits from fundamental tax reform. These findings brighten the political prospects for such a change in the future.
The editors of Transition Costs are R. Glenn Hubbard of Columbia University, newly designated chairman of President Bush’s Council of Economic Advisers and now a visiting scholar at A.E.I., and Kevin A. Hassett, a resident scholar at A.E.I. Mr. Hassett is coauthor with James K. Glassman of Dow 36,000, The New Strategy for Profiting from the Coming Rise in the Stock Market (Times Books, 1999).
The book contains three studies:
Kenneth L. Judd of the Stanford University’s Hoover Institution writes about "The Impact of Tax Reform in Modern Dynamic Economies." Mr. Judd makes the realistic assumption of imperfect competition and finds that it dramatically increases estimated benefits of tax reform. Alan J. Auerbach of the University of California at Berkeley comments.
Andrew B. Lyon of the University of Maryland and Peter R. Merrill of PricewaterhouseCoopers examine "Asset Price Effects of Fundamental Tax Reform." They find that the stock market would not fall significantly with the introduction of a consumption tax. James R. Hines Jr. of the University of Michigan School of Business comments.
Donald Bruce of the University of Tennessee, Knoxville, and Douglas Holtz-Eakin of Syracuse University ask "Will a Consumption Tax Kill the Housing Market?" by eliminating the mortgage interest deduction. Their conclusion, contrary to what earlier analysts have said, is that a sharp fall in house prices is not inevitable. William G. Gale of the Brookings Institution comments.
